Morning Report / The recovery / reflation trade is gathering momentum (MIN. NAB, CTD, MQG, NHF)

By Market Matters 23 February 21

The recovery / reflation trade is gathering momentum (MIN. NAB, CTD, MQG, NHF)

Market Matters Morning Report 23rd February 2021

The ASX200 drifted lower yesterday but the action under the hood remains very pronounced with 10 members of the index rallying by more than 5% but less than 40% of the index actually managed to close in positive territory i.e. it’s all about backing the right horse or in this case thematic / sector. Monday saw the travel stocks come back into favour while copper continued its acceleration higher conversely yield sensitive stocks like the Healthcare, Real Estate, Utilities and IT Sectors continued to struggle.

At MM we are more prepared than most to buy out of favour stocks if we believe their underlying valuation has become deeply compelling, extreme pessimism provides opportunity at times for the brave assuming the risk / reward makes sense. However, we wont take core positions which are structurally opposed to our underlying macro view which remains bullish a recovery / reflation hence we have no interest in bottom picking the current embattled market areas mentioned above.

Overnight we heard that Victoria and WA have joined the NSW bandwagon with Royal Commissions into Crown (CWN), I cannot imagine the result will be any worse than that delivered by Patricia Bergen, but it will undoubtedly make a few consultants & lawyers very happy, fees, fees and more fees! NSW took 12-months and spent $6.5m to decide CWN couldn’t hold a casino licence at its Barangaroo complex until it cleans up its act, whereas Daniel Andrews and Victoria are spending just 6-months and ~$4m, the results we believe will fundamentally be the same:

1 – Crown is not fit to hold a casino licence in its current state and Jamie Packer is eventually going to be forced out of what used to be the jewel in his wealth crown – no pun intended.

2 – An improved board and company will flourish moving forward once all the messy dust has settled but it wont happen overnight.

Remember the Banks were involved in their own Royal Commission between December 2017 and February 2019 however CBA’s shares bottomed in October 2018, almost exactly in the middle of the bad news, before rallying 40% + dividends i.e. the best buying opportunities often present themselves when the news is awful. Crown (CWN) shares are likely to be on the nose again today but this is not a part of the saga that MM didn’t expect to unfold.

Overnight saw a mixed night on Wall Street with the main point of note a weak IT sector leading to the NASDAQ falling over 2.5%, the SPI is indicating a 10-point dip early today with anything yield facing likely to struggle.

MM remains bullish the ASX200 through 2021 albeit in a volatile manner.

ASX200 Index Chart

Minerals Resources (MIN) remains on track to make our targeted new 2021 highs with our initial target ~5-8% higher. However, as we discussed with copper yesterday MIN could well be positioned to accelerate higher with the trend, it’s a 50-50 call to us and we will watch carefully but for now MM sees no reason to start reducing our resources exposure.

MM is bullish MIN targeting ~5-8% upside short-term.

Minerals Resources (MIN) Chart

National Australia Bank (NAB) has almost doubled since its COVID lows last March, while we are bullish the stock short-term a pullback towards $22 wouldn’t surprise – if this does unfold MM will be looking to increase our banking exposure.  The Bank of Queensland (BOQ) exits its trading halt on Thursday and it will be fascinating to see where it opens i.e. last trade was at $8.41 but it raised $1.35bn at $7.35, we feel that any meaningful dip under $8 will provide a solid buying opportunity.

MM is bullish Australian banks through 2021.

National Australia Bank (NAB) Chart

Overseas Indices & markets

US stocks were notably mixed overnight with the yield sensitive tech sector carrying the wooden spoon and falling fairly hard. The S&P500 continues to knock its head on the resistance line shown below, technically a test ~4000 would be an excellent risk / reward selling opportunity.

MM remains bullish stocks / risk assets through 2021 albeit in a volatile manner.

US S&P500 Chart

Commodity markets continued their bullish advance overnight led by crude oil which rallied almost 4% sending the Energy Sector up ~4.5% in the US. Again similar to copper this is slowly but surely feeling like an acceleration move to the upside which could surprise many and see a test of $US70/barrel in 2021.

MM is bullish crude oil.

Crude Oil March Futures ($US/barrel) Chart

The recovery / reflation trade is gathering momentum.

Australian 10-year bond yields exploded above 1.5% yesterday as the yield curve continues to steepen, I’m sure the RBA are watching proceedings very closely with concern around not so much the level as opposed to the acceleration of the move. Notably local 10-year bond yields are now trading at levels not seen since mid-2019, way before the world had even heard of COVID-19.

The current move in bond yields is polarising the sectors across the stock market, if you benefit from a steeper yield curve such as banks its great news but if it creates a headwind such as with utilities underperformance is flowing through e.g. overnight the US banks rallied strongly while the Utilities Sector was worst on ground.

MM is bullish Australian longer dated bond yields.

Australian 10-year Bond & 3-year yields Chart

The yield curve steepening is equally as pronounced in the US which does sow a seed of concern in my mind short-term – aggressive periods of US yield curve steepening often leads to a correction in US stocks.

Remember MM is looking for 2021 to be a volatile year, the current move in yields is a warning that a pullback is on the horizon, while I can see the S&P500 testing 4000 in the coming months I feel the next 10% swing is more likely to down than up. Going back to a point I made earlier when discussing CWN and CBA, things are looking good today on the economic and COVID front, we are considering moving slightly down the risk / curve in the weeks ahead.

US 2 & 10-year Bond Yields Chart

As the market splits itself almost in 2 halves around the above mentioned macro-economic picture today I have updated our view on 3 local stocks which look poised for strong gains although at this stage with our low cash holding we will also be considering what stocks should be cut from our portfolio.

1 Corporate Travel (CTD) $18.94.

CTD is perfectly positioned to benefit from the global re-opening as the COVID vaccine is rolled out globally, assuming the overall market behaves itself I feel CTD will be trading at fresh 2021 highs in the coming 1-2 months.

MM is bullish CTD short-term initially looking for 15% upside.

Corporate Travel (CTD) Chart

2 Macquarie Bank (MQG) $147.15.

Its not that often that MM talks about buying a stock that’s making fresh multi-month highs but after its latest report MQG fits that profile. We are bullish both the sector and the stock and feel MQG will be trading at least 10-15% higher in 2021 plus its due to deliver nice dividends in May & November.

MM is bullish MQG targeting fresh all-time highs.

Macquarie Bank (MQG) Chart

3 NIB Holdings (NHF) $5.74.

NHF delivered a solid result yesterday with profits up over 4% even as revenue declined illustrating the efficiency that many companies have been forced to adopt due to COVID, theoretically good news moving forward if management keep their foot to the metal. A 10c fully franked dividend early next month might also be attractive to some yield hungry players.

MM likes NHF with a short-term target ~15% higher.

NIB Holdings (NHF) Chart

Conclusion

Of the first 3 stocks looked at today MM likes all 3 with our current order of preference CTD, MQG and NHF.

Have a great day,

James & the Market Matters Team

Disclosure

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